2017 HSBC Bank Canada Regulatory Capital and Risk Management Pillar 3 Supplemental Disclosures as at September 30, 2017

Transcription

1 217 HSBC Bank Canada Regulatory Capital and Risk Management Pillar 3 Supplemental Disclosures as at September 3, 217

2 Index & Notes to Users Index Page Index Page Regulatory Capital Risk-Weighted Assets Exposure by Counterparty Type Exposure by Geography Residual Contract Maturity Breakdown 2-3 Risk Assessment - IRB Retail Portfolio 1 4 Risk Assessment - AIRB Non-Retail Portfolio 11 5 Exposures Covered by Risk Mitigation 12 6 AIRB Risk Exposures Securitization Disclosure Risk Portfolio Exposure at Default 8 Market Risk Exposures by Risk Weight Category 9 Glossary 22 Notes to Users Regulatory Capital and Risk Management Pillar 3 Disclosures The Office of the Superintendent of Financial Institutions ("OSFI") supervises HSBC Bank Canada (the "Bank") on a consolidate d basis. OSFI has approved the Bank's application to apply the Advanced Internal Ratings Based ("AIRB") approach to credit risk on our portfolio and the for measuring Operatio nal Risk. Please refer to the Annual Report and Accounts 216 for further information on the Bank s risk and capital management framework. Further information regarding HSBC Group Risk Manag ement Processes can be found in HSBC Holdings plc Capital and Risk Management Pillar 3 Disclosures available on HSBC Group s investor relations web site. The Pillar 3 Supplemental Disclosures are additional summary descriptions and quantitative financial information which supple ment those already made in the Annual Report and Accounts 216 for the disclosure requirements under OSFI s Pillar 3 Disclosure Requirements Advisory issued September 29, 26 consistent with the "International Convergence of Capital Measurement and Capital Standards" ('Basel II') issued by the Basel Committee on Supervision (BCBS) in June 26 and the Composition of capi tal disclosure requirements ( Basel III ) issued by the BCBS in June 212 under OSFI s advisory letter requirements issued in July 213 and revised April 214. Pillar 3 complements the minimum capital requirements and the supervisory review process. Its aim is to encourage market dis cipline by developing a set of disclosure requirements which will allow market participants to assess certain specified information on the scope of application of Basel II/III ( the Basel rules ), capital, particular risk exposures, risk assessment processes, and hence the capital adequacy of the institution. The supervisory objectives of BCBS are to promote safety and soundness in the financial system and maintain an appropriate le vel of capital in the system, enhance competitive equality, constitute a more comprehensive approach to addressing risks, and focus on internationally active banks. The Basel rules are structured a round three "pillars": pillar 1, minimum capital requirements, pillar 2, supervisory review and pillar 3, market discipline. On June 26, 212, the BCBS issued the Basel III rules on the information banks must publicly disclose when detailing the comp osition of their capital, which set out a framework to ensure that the components of banks capital bases are publicly disclosed in standardised formats across and within jurisdictions for banks su bject to Basel III. Basel III builds on Basel II. It also increases the level of risk-weighted assets for significant investments and deferred tax amounts due to temporary timing differences under defined thresholds, exposures to large or unregulated financial institutions meeting specific criteria, exposures to centralized counterparties a nd exposures that give rise to wrong way risk. In addition Basel III places a greater emphasis on common equity by introducing a new category of capital, Common Equity Tier 1 (CET1), which consists prima rily of common shareholders equity net of regulatory adjustments. These regulatory adjustments include goodwill, intangible assets, deferred tax assets, pension assets and investments in fina ncial institutions over certain thresholds. Overall, the Basel III rules increase the level of regulatory deductions relative to Basel II. Effective November 1, 212, Canadian banks are subject to the revised capital adequacy requirements of Basel III as published by the BCBS. OSFI announced its decision to implementation of the Valuation Adjustment (CVA) on Bilateral derivatives starting Q Effective with public disclosures beginning in Q1, 213, Banks are subject to disclosure requirements under OSFI s Guidelines on Residential Mortgage Underwriting Practices and Procedures (B-2). Effective with public disclosures beginning in Q1, 214 and Q3 214, non-domestic Systemically Important Banks (non-dsibs as determined by OSFI) are required to disclose a modified version of the Capital Disclosure as described in the OSFI Advisory "Public Capital Disclosure Requirements related to Basel III Pillar 3" d ated July 213 and revised April 213. Effective with public disclosures beginning in Q1, 216, OSFI has authorized HSBC Bank Canada's Market Risk model. As a resu lt, credit risk exposures exclude the trading portfolio. This report is unaudited and all amounts are in rounded millions of Canadian dollars, unless otherwise indicated. Page 1

3 Basel III Regulatory Capital All-in 1 Common Equity Tier 1 capital: instruments and reserves 3Q 217 2Q 217 1Q 217 4Q 216 3Q 216 2Q 216 1Q 216 4Q Directly issued qualifying common share capital (and equivalent for non-joint stock companies) plus related stock surplus 1,225 1,225 1,225 1,225 1,225 1,225 1,225 1,225 2 Retained earnings 3,65 3,533 3,445 3,313 3,31 3,263 3,246 3,29 3 Accumulated other comprehensive income (and other reserves) (65) Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies) na na na na na na na na 5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) na na na na na na na na 6 Common Equity Tier 1 capital before regulatory adjustments 4,81 4,763 4,731 4,565 4,72 4,634 4,561 4,526 Common Equity Tier 1 capital: regulatory adjustments 28 regulatory adjustments to Common Equity Tier 1 (1) (134) (179) (173) (221) (22) (233) (198) 29 Common Equity Tier 1 capital (CET1) 4,71 4,629 4,552 4,391 4,481 4,414 4,328 4,328 Additional Tier 1 capital: instruments 3 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus of which: classified as equity under applicable accounting standards of which: classified as liabilities under applicable accounting standards na na na na na na na na 33 Directly issued capital instruments subject to phase out from Additional Tier Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1) of which: instruments issued by subsidiaries subject to phase out Additional Tier 1 capital before regulatory adjustments Additional Tier 1 capital: regulatory adjustments 43 regulatory adjustments to Additional Tier 1 capital na na na na na na na na 44 Additional Tier 1 capital (AT1) Tier 1 capital (T1 = CET1 + AT1) 5,56 5,479 5,42 5,241 5,331 5,264 5,178 5,178 Tier 2 capital: instruments and allowances 46 Directly issued qualifying Tier 2 instruments plus related stock surplus 1, 1, na na na na na na 47 Directly issued capital instruments subject to phase out from Tier Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) na na na na na na na na 49 of which: instruments issued by subsidiaries subject to phase out na na na na na na na na 5 Impairment allowances Tier 2 capital before regulatory adjustments 1,42 1, Tier 2 capital: regulatory adjustments 57 regulatory adjustments to Tier 2 capital na na na na na na na na 58 Tier 2 capital (T2) 1,42 1, capital (TC = T1 + T2) 6,62 6,521 5,784 5,686 5,783 5,72 5,677 5,763 6 risk-weighted assets na na na na na na na na 6a Common Equity Tier 1 (CET1) Capital 2 43,624 44,281 42,921 41,79 41,915 42,442 43,69 42,846 6b Tier 1 Capital 2 43,624 44,281 42,921 41,79 41,915 42,442 43,69 42,846 6c Capital 2 43,624 44,281 42,921 41,79 41,915 42,442 43,69 42,846 (1) "All-in" regulatory capital assumes that all Basel III regulatory adjustments are applied effective January 1, 213 and that the capital value of instruments which no longer qualify as regulatory capital under Basel III rules will be phased out at a rate of 1% per year from January 1, 213 and continuing to January 1, 222. (2) Since Q1 217, CVA risk-weighted assets were calculated using the scalars of.72,.77 and.81 to compute CET1 capital ratio, Tier 1 capital ratio and capital ratio respectively. Including Regulatory Floor Adjustment. Page 2

4 Basel III Regulatory Capital (Continued) All-in Basis 1 Capital ratios 3Q 217 2Q 217 1Q 217 4Q 216 3Q 216 2Q 216 1Q 216 4Q Common Equity Tier 1 (as percentage of risk-weighted assets) 1.8% 1.5% 1.6% 1.5% 1.7% 1.4% 1.% 1.1% 62 Tier 1 (as percentage of risk-weighted assets) 12.7% 12.4% 12.6% 12.5% 12.7% 12.4% 12.% 12.1% 63 capital (as percentage of risk-weighted assets) 15.1% 14.7% 13.5% 13.6% 13.8% 13.5% 13.2% 13.5% OSFI all-in target 69 Common Equity Tier 1 capital all-in target ratio 7.% 7.% 7.% 7.% 7.% 7.% 7.% 7.% 7 Tier 1 capital all-in target ratio 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 71 capital all-in target ratio 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Current cap on CET1 instruments subject to phase out arrangements (only applicable between 1 Jan 213 and 1 Jan 222) 8 Current cap on CET1 instruments subject to phase out arrangements 5% 5% 5% 6% 6% 6% 6% 7% 81 (excess over cap after redemptions and maturities) na na na na na na na na 82 Current cap on AT1 instruments subject to phase out arrangements 5% 5% 5% 6% 6% 6% 6% 7% Amounts excluded from AT1 due to cap 83 (excess over cap after redemptions and maturities) Current cap on T2 instruments subject to phase out arrangements 5% 5% 5% 6% 6% 6% 6% 7% Amounts excluded from T2 due to cap 85 (excess over cap after redemptions and maturities) Transitional Basis 2 Capital 3Q 217 2Q 217 1Q 217 4Q 216 3Q 216 2Q 216 1Q 216 4Q Common Equity Tier 1 capital (CET1) 4,743 4,655 4,6 4,45 4,526 4,444 4,385 4, Tier 1 capital (T1 = CET1 + AT1) 5,581 5,494 5,428 5,277 5,351 5,274 5,216 5, capital (TC = T1 + T2) 6,619 6,534 5,86 5,719 5,82 5,73 5,715 5,812 6 risk-weighted assets 43,774 44,415 43,181 42,3 42,131 42,659 43,267 43,141 Capital ratios 61 Common Equity Tier 1 (as percentage of risk-weighted assets) 1.8% 1.5% 1.7% 1.6% 1.7% 1.4% 1.1% 1.2% 62 Tier 1 (as percentage of risk-weighted assets) 12.7% 12.4% 12.6% 12.6% 12.7% 12.4% 12.1% 12.1% 63 capital (as percentage of risk-weighted assets) 15.1% 14.7% 13.5% 13.6% 13.8% 13.4% 13.2% 13.5% Leverage Ratio 5.1% 4.9% 4.8% 4.7% 4.8% 4.8% 4.8% 4.7% (1) "All-in" regulatory capital assumes that all Basel III regulatory adjustments are applied effective January 1, 213 and that the capital value of instruments which no longer qualify as regulatory capital under Basel III rules will be phased out at a rate of 1% per year from January 1, 213 and continuing to January 1, 222. (2) Transitional regulatory capital assumes that all Basel III regulatory capital adjustments are phased in from January 1, 214 to January 1, 218 and that the capital value of instruments which no longer qualify as regulatory capital under Basel III rules will be phased out at a rate of 1% per year from January 1, 213 and continuing to January 1, 222. Page 3

5 Risk-Weighted Assets¹ Risk-Weighted Assets () Advanced Corporate 47, ,981 24,7 47, ,618 24,692 48, ,993 25,17 48, ,72 25,89 Sovereign 2, , , , Bank 11, , , , ,892-1,822 1,822 2,821-1,777 1,777 19,94-1,754 1,754 19,837-1,745 1,745 HELOC's 2, , , , (excluding QRR and SME) 1, , , , Qualifying Revolving Retail Exposures subject to standardized or IRB approaches (6) 17, ,123 28,48 16, ,743 29,164 17, ,172 29,539 17, ,293 29,69 Equity (3) Securitization (4) Other assets not included in standardized or IRB approaches (5) 4, ,244 9, ,199 8, ,143 7, ,758 Adjustment to IRB risk-weighted assets for scaling factor , , , ,76 Risk 112,558 32, ,73 33,59 115,749 33,85 114,683 33,247 Market Risk (6) 1,45 1,298 1, Operational Risk - 3,678 3,669 3,662 3,697 Risk-Weighted Assets before adjustments 37,569 38,476 38,735 37,9 after adjustment for CVA phase-in (5) Common Equity Tier 1 (CET1) Capital 37,388 38,275 38,512 37,595 Tier 1 Capital 37,42 38,311 38,552 37,654 Capital 37,446 38,339 38,584 37,75 Adjustment for Regulatory Floor (7) CET1 Capital Floor 6,236 6,6 4,49 4,195 Tier 1 Capital Floor 6,24 5,97 4,37 4,136 Capital Floor 6,178 5,941 4,338 4,85 Adjusted Risk-Weighted Assets Adjusted Common Equity Tier 1 (CET1) Capital 43,624 44,281 42,921 41,79 Adjusted Tier 1 Capital 43,624 44,281 42,921 41,79 Adjusted Capital 43,624 44,281 42,921 41,79 Risk-Weighted Assets () Exposure (2) Exposure (2) September 3, 217 September 3, 216 Advanced Exposure (2) Exposure (2) June 3, 217 Corporate 48,47-26,314 26,314 49,261-27,758 27,758 49,747-27,4 27,4 53,899-27,896 27,896 Sovereign 22, , , , Bank 11, , , , ,299-1,823 1,823 2,244-1,869 1,869 19,665-1,818 1,818 19,243-1,781 1,781 HELOC's 2, , , , (excluding QRR and SME) 2, , , , Qualifying Revolving Retail Exposures subject to standardized or IRB approaches 19, ,696 31,91 17, ,256 32,663 11, ,613 32,46 117, ,688 33,17 Equity (3) Securitization (4) Book 5, ,971 3, ,42 3, ,324 2, ,77 Other assets not included in standardized or IRB approaches (5) , , , ,963 Adjustment to IRB risk-weighted assets for scaling factor 115,9 34, ,818 36,79 114,251 36, ,942 37,232 Risk ,489 - Market Risk (6) 3,692 3,78 3,72 3,71 Operational Risk - 39,432 41,384 41,581 4,942 Risk-Weighted Assets before adjustments after adjustment for CVA phase-in (5) 39,46 4,97 41,112 4,519 Common Equity Tier 1 (CET1) Capital 39,121 41,5 41,23 4,62 Tier 1 Capital 39,185 41,119 41,282 4,672 Capital Adjustment for Regulatory Floor (7) 2,87 1,473 1,957 2,327 CET1 Capital Floor 2,795 1,392 1,865 2,244 Tier 1 Capital Floor 2,73 1,323 1,787 2,174 Capital Floor Adjusted Risk-Weighted Assets 41,915 42,442 43,69 42,846 Adjusted Common Equity Tier 1 (CET1) Capital 41,915 42,442 43,69 42,846 Adjusted Tier 1 Capital 41,915 42,442 43,69 42,846 Adjusted Capital 41,642 41,642 41,642 41,642 (1) Effective Q1 213, amounts are calculated in accordance with the Basel III regulatory framework, and are presented based on the all-in methodology. (6) Market Risk is the risk that the value of a portfolio will decrease due to movements in market factors, such as interest rates, (2) Exposure represents gross exposure at default before allowances and credit risk mitigation. foreign exchange rates, credit spreads, equity prices and commodity prices. Effective Q1 216, OSFI has authorised HSBC (3) Under OSFI guidelines the Bank is exempt from using the AIRB approach based on materiality. Accordingly equity investments are risk weighted at 1%. Bank Canada's Market Risk model. As a result, credit risk exposures exclude the trading portfolio. (4) Securitization exposures are currently treated as on balance sheet exposures and included in the Basel III counterparty category to which the exposures relate. (7) The Bank is subject to a regulatory capital floor according to transitional arrangements (5) Commencing 214, a new CVA regulatory capital charge has been added. For Q1 and Q2 214 the CVA regulatory capital charge has been reflected in prescribed by OSFI. OSFI has given the Bank their approval to reduce the capital floor to 9%. s included in Other assets and is calculated using the standardized method and a scalar of.57. Commencing Q1 217 the CVA risk-weighted assets commencing with the third quarter 28 regulatory reporting period. were calculated using the scalars of.72,.77 and.81 to compute CET1 capital, Tier 1 capital and capital respectively. Advanced June 3, 216 Advanced Exposure (2) Exposure (2) March 31, 217 Advanced March 31, 216 Advanced Exposure (2) Exposure (2) December 31, 216 Advanced December 31, 215 Advanced Page 4

6 Exposure by Counterparty Type () () September 3, 217 June 3, 217 Corporate 28,231 11,776 3, ,816 47,329 28,626 11,989 3,1 1,69 3,87 47,78 Sovereign 19, ,999 18, , ,624 Bank 3, , ,78 3, , ,544 Corporate, Sovereign and Bank (1) 51,192 12,447 1,663 2, 3,86 8,17 5,934 12,661 1,28 2,139 4,6 79,948 21, ,892 2, ,821 HELOC's 1,747 1,33-2,781 1,769 1,26-2,795 (excluding QRR and SME) 1, ,857 1, ,915 Qualifying Revolving Retail Retail 25,77 1, ,412 24,725 1, ,425 Gross Exposure 76,898 14,137 1,663 2, 3,821 17,519 75,659 14,345 1,28 2,139 4,22 16,373 March 31, 217 December 31, 216 Corporate 27,674 12,5 3,993 1,148 3,137 48,2 27,549 12,373 3,849 1,176 3,324 48,272 Sovereign 2, ,255 22, ,28 Bank 3,937 6, ,39 3, , ,93 Corporate, Sovereign and Bank 51,679 12,688 11,15 1,987 4,61 81,566 53,917 12,624 8,6 2,217 4,215 81,573 19, ,94 19, ,837 HELOC's 1,78 1,27-2,87 1,87 1,29-2,836 (excluding QRR and SME) 1, ,99 1, ,79 Qualifying Revolving Retail Retail 23,933 1, ,577 23,976 1, ,625 Gross Exposure 75,612 14,317 11,15 1,987 4,77 17,143 77,894 14,256 8,6 2,217 4,233 17,199 September 3, 216 June 3, 216 Corporate 28,58 11,599 4,216 1,288 3,31 48,47 28,411 12,36 3,785 1,255 3,54 49,261 Sovereign 21, ,85 2, ,17 Bank 3,78 9 6, ,992 3,752 5, ,83 Corporate, Sovereign and Bank 53,553 12,13 11,35 2,138 4,258 83,267 52,284 12,541 9,773 2,414 4,438 81,451 2, ,299 2,24 4-2,244 HELOC's 1,852 1,45-2,898 1,882 1,49-2,931 (excluding QRR and SME) 2, ,181 2, ,261 Qualifying Revolving Retail Retail 24,589 1, ,273 24,66 1, ,371 Gross Exposure 78,142 13,678 11,35 2,138 4,277 19,54 76,944 14,233 9,773 2,414 4,458 17,822 March 31, 216 December 31, 215 Corporate 28,364 12,143 4,56 1,287 3,447 49,747 29,569 12,995 5,98 1,917 3,511 53,899 Sovereign 2, ,533 24, ,74 Bank 2,878-8,32 1, ,636 3,511-6,738 1, ,953 Bank 52,28 12,372 13,156 3,233 4,127 84,916 57,886 13,19 12,98 3,545 4,63 91,592 Corporate, Sovereign and Bank 19,665-19,665 19, ,243 1,855 1,45-2,9 1,862 1,4-2,92 HELOC's 2, ,35 2, ,56 Qualifying Revolving Retail Retail 24,167 1, ,886 23,911 1, ,649 Gross Exposure 76,195 14,71 13,156 3,233 4,147 11,82 81,797 14,96 12,98 3,545 4,86 117,241 (1) Effective Q1 216, OSFI has authorised HSBC Bank Canada's Market Risk model. As a result, credit risk exposures exclude the trading portfolio. Page 5

7 Exposure by Geography () () British Columbia 23,53 3, ,763 22,535 3, ,11 Western Canada, excluding British Columbia 8,281 3, ,879 8,388 3, ,485 Ontario 38,745 4,463 8,664 1,34 2,62 55,238 37,344 4,69 8,446 1,283 2, 53,763 Quebec & Atlantic provinces 6,82 2,57 1, ,639 7,392 2,257 1, ,114 Other Gross Exposure (1) 76,898 14,137 1,663 2, 3,821 17,519 75,659 14,345 1,28 2,139 4,22 16,373 () () British Columbia 22,27 3,453 1, ,262 22,413 3, ,479 Western Canada, excluding British Columbia 8,655 3, ,977 8,775 4, ,578 Ontario 38,51 4,638 9,18 1,88 2,19 54,975 4,33 4,331 6,827 1,265 1,957 54,412 Quebec & Atlantic provinces 6,699 2, ,929 6,673 2, ,731 Other Gross Exposure 75,612 14,317 11,15 1,987 4,77 17,143 77,894 14,256 8,6 2,217 4,233 17,199 () () British Columbia 22,677 3, ,818 22,887 3, ,898 Western Canada, excluding British Columbia 9,338 4, ,73 9,664 4, ,149 15,924 Ontario 39,392 4,231 11,11 1,58 1,995 57,776 37,69 4,568 9,691 1,357 1,955 55,26 Quebec & Atlantic provinces 6,736 2, ,872 6,74 1, ,74 Other Gross Exposure 78,142 13,678 11,35 2,138 4,277 19,54 76,944 14,233 9,773 2,414 4,458 17,822 () March 31, 216 December 31, 215 () British Columbia 22,687 3, ,628 21,579 3, ,84 Western Canada, excluding British Columbia 9,87 4, ,168 16,1 1,458 4, ,176 17,64 Ontario 36,82 4,394 13,156 2,245 1,673 58,288 42,585 4,531 12,98 1,924 1,594 63,542 Quebec & Atlantic provinces 6,817 1, ,785 7,175 2, ,796 Other Gross Exposure 76,195 14,71 13,156 3,233 4,147 11,82 81,797 14,96 12,98 3,545 4,86 117,241 (1) Effective Q1 216, OSFI has authorised HSBC Bank Canada's Market Risk model. As a result, credit risk exposures exclude the trading portfolio. September 3, 217 March 31, 217 September 3, 216 June 3, 217 December 31, 216 June 3, 216 Page 6

8 Residual Contract Maturity Breakdown () () Within 1 year 23,226 8,371 1, ,781 45,955 22,498 8,579 1, ,193 45, years 46,692 5, ,9 46,117 5, ,28 Greater than 5 years 6, ,554 7, ,875 Gross Exposure (1) 76,898 14,137 1,663 2, 3,821 17,519 75,659 14,345 1,28 2,139 4,22 16,373 () () Within 1 year 2,84 8,462 11, ,1 44,258 2,267 8,689 8,6 1,18 3,128 41, years 47,434 5, ,16 54,733 48,7 5, ,59 55,768 Greater than 5 years 7, ,152 8, ,73 Gross Exposure 75,612 14,317 11,15 1,987 4,77 17,143 77,894 14,256 8,6 2,217 4,233 17,199 () () Within 1 year 22,674 8,33 11, ,178 46,9 24,96 8,466 9, ,56 46, years 46,462 5, ,49 53,633 44,193 5, ,266 Greater than 5 years 9, ,898 8, ,759 Gross Exposure 78,142 13,678 11,35 2,138 4,277 19,54 76,944 14,233 9,773 2,414 4,458 17,822 () () Within 1 year 24,297 8,432 13,156 1,412 3,167 5,464 24,67 8,766 12,98 1,76 3,145 51, years 41,915 5,441-1, ,37 45,243 5,777-1, ,125 Greater than 5 years 9, ,31 11, ,867 Gross Exposure 76,195 14,71 13,156 3,233 4,147 11,82 81,797 14,96 12,98 3,545 4,86 117,241 (1) Effective Q1 216, OSFI has authorised HSBC Bank Canada's Market Risk model. As a result, credit risk exposures exclude the trading portfolio. September 3, 217 March 31, 217 September 3, 216 March 31, 216 June 3, 217 December 31, 216 June 3, 216 December 31, 215 Page 7

9 Risk Portfolio Exposure at Default September 3, 217 June 3, 217 March 31, 217 December 31, 216 AIRB AIRB AIRB AIRB Corporate 26-28,25 11, ,551 11, ,65 12, ,532 12,373 Sovereign , , , , Bank - - 3, , , , Corporate, Sovereign and Bank (1) 26-51,165 12, ,86 12, ,656 12, ,91 12, , , , ,835 3 HELOC's - - 1,747 1, ,769 1, ,78 1, ,87 1,29 (excluding QRR and SME) 439-1, , , , Qualifying Revolving Retail Retail ,268 1, ,266 1, ,478 1, ,473 1,632 Gross Exposure ,434 14, ,125 14, ,133 14, ,374 14,256 September 3, 216 June 3, 216 March 31, 216 December 31, 215 AIRB AIRB AIRB AIRB Corporate ,58 11, ,411 12, ,364 12, ,569 12,995 Sovereign , , , , Bank - - 3, , , ,511 - Corporate, Sovereign and Bank ,553 12, ,284 12, ,28 12, ,886 13, , , , ,239 4 HELOC's - - 1,852 1, ,882 1, ,855 1, ,862 1,4 (excluding QRR and SME) 515-1, , , , Qualifying Revolving Retail Retail ,74 1, ,121 1, ,593 1, ,273 1,716 Gross Exposure ,627 13, ,45 14, ,621 14, ,159 14,96 (1) Effective Q1 216, OSFI has authorised HSBC Bank Canada's Market Risk model. As a result, credit risk exposures exclude the trading portfolio. Page 8

10 Exposures by Risk Weight Category September 3, 217 June 3, 217 Risk Weight Category Risk Weight Category % 2% 35% 5% 75% 1% 15% % 2% 35% 5% 75% 1% 15% Corporate % % % % % 26 % 26 % % % % % 75 % 75 Sovereign - - Bank - - Corporate, Sovereign and Bank (1) Heloc's Retail Exposure at Default % 2% 35% 5% 75% 1% 15% % 2% 35% 5% 75% 1% 15% Corporate % % % % % 24 % 24 % % % % % 17 % 17 Sovereign - - Bank - - Corporate, Sovereign and Bank Heloc's Retail Exposure at Default % 2% 35% 5% 75% 1% 15% % 2% 35% 5% 75% 1% 15% Corporate % % % % % % % - % % % % % % % - Sovereign - - Bank - - Corporate, Sovereign and Bank Heloc's Retail Exposure at Default March 31, 216 December 31, 215 Risk Weight Category Risk Weight Category % 2% 35% 5% 75% 1% 15% % 2% 35% 5% 75% 1% 15% Corporate % % % % % % % - - Sovereign - - Bank - - Corporate, Sovereign and Bank Heloc's Retail Exposure at Default March 31, 217 Risk Weight Category September 3, 216 Risk Weight Category December 31, 216 Risk Weight Category June 3, 216 Risk Weight Category Page 9

11 Risk Assessment - IRB Retail Portfolio Residential Mortgages HELOC (excl. QRR and SME) Qualifying Revolving Retail Residential Mortgages HELOC (excl. QRR and SME) Qualifying Revolving Retail Strong 21,67 2,669 1, ,22 2,526 2,714 1, ,2 Medium Sub-Standard Impaired/Default Exposure at Default 21,892 2,781 1, ,973 2,821 2,795 1, ,966 Residential Mortgages HELOC (excl. QRR and SME) Qualifying Revolving Retail Residential Mortgages HELOC (excl. QRR and SME) Qualifying Revolving Retail Strong 19,633 2,724 1, ,339 19,521 2,749 1, ,325 Medium Sub-Standard Impaired/Default Exposure at Default 19,94 2,87 1, ,122 19,837 2,836 1, ,122 Residential Mortgages HELOC (excl. QRR and SME) Qualifying Revolving Retail Residential Mortgages HELOC (excl. QRR and SME) Qualifying Revolving Retail Strong 19,968 2,89 1, ,921 19,94 2,836 1, ,945 Medium Sub-Standard Impaired/Default Exposure at Default 2,299 2,898 1, ,758 2,244 2,931 1, ,832 Residential Mortgages HELOC (excl. QRR and SME) Qualifying Revolving Retail Residential Mortgages HELOC (excl. QRR and SME) Qualifying Revolving Retail Strong 19,323 2,794 1, ,387 18,919 2,786 1, ,88 Medium Sub-Standard Impaired/Default Exposure at Default 19,665 2,9 1, ,313 19,243 2,92 1, ,11 September 3, 217 March 31, 217 September 3, 216 March 31, 216 June 3, 217 December 31, 216 June 3, 216 December 31, 215 Page 1

12 Risk Assessment - AIRB Non-Retail Portfolio (1) Internal Rating Corporate EAD PD LGD Risk Weight EAD PD LGD Minimal Risk 1, , , , Low Risk 3, , , , Satisfactory Risk 22, , , , Fair Default Risk 11, , , , Moderate Default Risk 3, , , , Significant Default Risk High Default Risk Special Management Default Corporate (2) 43, , , , Sovereign Minimal Risk 2, , , , Low Risk Satisfactory Risk Fair Default Risk Default Sovereign (2) 2, , , , Bank Minimal Risk 4, , , , Low Risk Satisfactory Risk Fair Default Risk Moderate Default Risk Significant Default Risk High Default Risk Special Management Default Bank (2) 5, , , , EAD September 3, 217 June 3, 217 March 31, 217 December 31, 216 Risk Weight September 3, 216 June 3, 216 March 31, 216 PD LGD Risk Weight EAD PD LGD Internal Rating Corporate Minimal Risk , , Low Risk 3, , , , Satisfactory Risk 21, , , , Fair Default Risk 11, , , , Moderate Default Risk 3, , , , Significant Default Risk 1, , , High Default Risk , , Special Management Default Corporate 44, , , , Sovereign Minimal Risk 22, , , , Low Risk Satisfactory Risk Fair Default Risk Default Sovereign 22, , , , Bank Minimal Risk 4, , , , Low Risk , , Satisfactory Risk Fair Default Risk Moderate Default Risk Significant Default Risk High Default Risk Special Management Default Bank 5, , , , (1) Net of collateral, guarantees and credit derivates "EAD" - Exposure at Default, "PD" - Probablitilty of Default, "LGD" - Loss Given Default, "Risk Weight %" is a Weighted Average based on EAD (2) Effective Q1 216, OSFI has authorised HSBC Bank Canada's Market Risk model. As a result, credit risk exposures exclude the trading portfolio. Risk Weight EAD EAD PD PD LGD LGD Risk Weight Risk Weight EAD EAD PD PD LGD December 31, 215 LGD Risk Weight Risk Weight Page 11

13 Exposures Covered By Risk Mitigation Eligible Financial Collateral AIRB AIRB AIRB AIRB Eligible Financial Collateral Eligible Financial Collateral Eligible Financial Collateral Counterparty Type Corporate ,72 1,18 Sovereign Bank Corporate, Sovereign and Bank , ,18 2,57 1,539 1,71 1,888 HELOC's (excluding QRR and SME) Qualifying Revolving Retail Retail - - 2, , , , , , , ,996 Eligible Financial Collateral June 3, 216 March 31, 216 December 31, 215 AIRB AIRB AIRB AIRB Eligible Financial Collateral Eligible Financial Collateral Eligible Financial Collateral Counterparty Type Corporate 1,43 1,9 1,16 1,32 Sovereign Bank Corporate, Sovereign and Bank - - 1, , , ,32 1,82 1,94 2,7 2,3 HELOC's (excluding QRR and SME) Qualifying Revolving Retail Retail - - 1, , , , , , , ,62 September 3, 217 September 3, 216 June 3, 217 March 31, 217 December 31, 216 Page 12

14 AIRB Risk Exposures - Notional EAD on Notional EAD on Notional EAD on Notional EAD on Counterparty Type Corporate 29,4 11,776 29,94 11,989 3,38 12,5 3,778 12,373 Sovereign 1, , , Bank Corporate, Sovereign and Bank 31,43 12,447 31,545 12,661 31,656 12,688 31,529 12, HELOC's 3,354 1,33 3,32 1,26 3,298 1,27 3,31 1,29 (excluding QRR and SME) Qualifying Revolving Retail Retail 5,95 1,69 5,7 1,684 5, 1,628 5,29 1,632 36,138 14,137 36,615 14,345 36,656 14,317 36,558 14,256 Notional EAD on Notional EAD on Notional EAD on Notional EAD on Counterparty Type Corporate 28,823 11,599 3,313 12,36 29,966 12,143 32,94 12,995 Sovereign Bank Corporate, Sovereign and Bank 29,991 12,13 31,13 12,541 3,882 12,372 32,761 13, HELOC's 3,333 1,45 3,35 1,49 3,319 1,45 3,281 1,4 (excluding QRR and SME) Qualifying Revolving Retail Retail 5,89 1,666 5,96 1,692 5,138 1,699 5,147 1,716 35,8 13,678 36,19 14,233 36,2 14,71 37,98 14,96 September 3, 217 June 3, 217 September 3, 216 June 3, 216 March 31, 217 December 31, 216 March 31, 216 December 31, 215 Page 13

15 Securitization Securitization strategy HSBC acts as originator, sponsor, investor, liquidity provider and derivative counterparty to its own originated and sponsored securitizations, as well as those of third party securitizations. Our strategy is to use securitizations to meet our needs for aggregate funding or capital management, to the extent that market regulatory treatments and other conditions are suitable, and for customer facilitation. Our roles in the securitization process are as follows: Originator: where we originate the assets being securitized; Sponsor: where we establish and manage a securitization programme that purchases exposures from third parties and provide derivatives or liquidity facilities; and Investor: where we invest in a securitization transaction directly. HSBC as an originator We securitize National Housing Act ( NHA ) mortgage backed securities ( MBS ) through programs sponsored by the Canada Mortgage and Housing Corporation. Under International Financial Reporting Standards ( IFRS ), the terms of the transaction do not meet the de-recognition criteria included within IAS 39 because the pass-through test is not met. Therefore, the transaction is accounted for as a secured borrowing with the underlying mortgages of the MBS remaining on balance sheet and a liability recognized for the funding received, with no recognition of gains or losses on transfer. Risk weighted assets are calculated on the mortgage pools and no regulatory relief is taken on the securitization. As a result, these are not considered securitization exposures and have been excluded from all securitization quantitative disclosures. HSBC as sponsor We act as financial services agent for a multi-seller asset-backed commercial paper conduit program ( multi-seller conduit ) and also provide swap and liquidity facilities. This multi-seller conduit provides the bank s clients with alternate sources of financing through the securitization of their assets. Clients sell financial assets to the conduit and the conduit funds its purchase of such financial assets through the issuance of short-term asset-backed commercial paper to investors. Each client continues to service the financial assets they have sold to the multi-seller conduit and absorbs the first losses associated with such assets. The bank has no rights to the assets as they are owned by the multi-seller conduit. For more detail on the liquidity facilities outlined above, refer to the note on contingent liabilities, contractual commitments and guarantees, Annual Report and Accounts 216. Page 14

16 Securitization HSBC as investor We have exposure to third party securitizations in the form of NHA MBS, Canada Housing Trust bullet bonds, non-nha residential mortgage securitizations and asset backed commercial paper. These securitization positions are managed by a dedicated team that uses a combination of market standard systems and third party data providers to monitor performance data and manage market and credit risks. For a description of the bank s credit and market risk policies please refer to the credit risk and market risk sections in Management s Discussion and Analysis, Annual Report and Accounts 216. Valuation of securitization positions The valuation process of our investments in securitization exposures primarily focuses on quotations from third parties, observed trade levels and calibrated valuations from market standard models. This process has not changed during 217. Further details may be found in the notes on significant account policies and fair value of financial instruments, Annual Report and Accounts 216. Securitization activities during 217 No activity during 217. Calculation of risk-weighted assets for securitization exposures Securitization exposures are currently treated as on balance sheet and included in the Basel III category to which the exposures relate. The bank uses the Advanced Internal Ratings Based approach (AIRB). This approach uses the bank s own historical experience of probability of default (PD), loss given default (LGD) and exposure at default (EAD) and other key risk assumptions to calculate credit risk capital requirements. Securitization accounting treatment For information on the bank s securitization accounting treatment, please refer to the note on significant account policies, Annual Report and Accounts 216. Page 15

17 Securitization Exposures Securitization exposure - by trading and banking ¹ ² At September 3, 217 At June 3, 217 At March 31, 217 At December 31, 216 As Sponsor³ Trade receivables As Investor Residential mortgages Trade receivables At September 3, 216 At June 3, 216 At March 31, 216 At December 31, 215 As Sponsor³ Trade receivables As Investor Residential mortgages Trade receivables All securitizations exposures result from traditional securitizations. National Housing Association MBS and bonds issued by Canada Housing Trust are not considered securitization exposures and are excluded. 2 All securitization exposures in role of Investor are recorded on-; exposures in role of Sponsor are off- with the exception of $4 million at March 214 (zero for periods thereafter) in respect of derivative contracts with the bank sponsored multi-seller conduit. 3 Securitization exposures in role of sponsor are reported pre credit conversion factor. Securitization exposure - movement year to date at Year to date movement at January 1 As sponsor As investor September Aggregate amount of securitization exposures (retained or purchased) Residential mortgages - - Trade receivables Securitization exposure - asset values and impairment charges At September 3, 217 At June 3, 217 At March 31, 217 At December 31, 216 Securitization Securitization Securitization Securitization Underlying assets¹ exposures Underlying assets¹ exposures Underlying assets¹ exposures Underlying assets¹ exposures Impaired & Impairment Impaired & Impairment Impaired & Impairment Impaired & Impairment past due charge past due charge past due charge past due charge As Sponsor Trade receivables As Investor Residential mortgages Trade receivables At September 3, 216 At June 3, 216 At March 31, 216 At December 31, 215 Securitization Securitization Securitization Securitization Underlying assets¹ exposures Underlying assets¹ exposures Underlying assets¹ exposures Underlying assets¹ exposures Impaired & Impairment Impaired & Impairment Impaired & Impairment Impaired & Impairment past due charge past due charge past due charge past due charge As Sponsor Trade receivables As Investor Residential mortgages Trade receivables For securitisations where HSBC acts as investor, information on third-party underlying assets is not available. Page 16

18 Securitization Exposures Securitization exposures by risk weighting Exposure value at September 3, 217 Exposure value at June 3, 217 Exposure value at March 31, 217 Exposure value at December 31, 216 Category risk weights 1% > 1% 2% > 2% 5% > 5% 1% > 1% 65% > 65% < 125% % Exposure value at September 3, 216 Exposure value at June 3, 216 Exposure value at March 31, 216 Exposure value at December 31, 215 Category risk weights 1% > 1% 2% > 2% 5% > 5% 1% > 1% 65% > 65% < 125% % Capital required by risk weighting Capital required at September 3, 217 Capital required at June 3, 217 Capital required at March 31, 217 Capital required at December 31, 216 Category risk weights 1% > 1% 2% > 2% 5% > 5% 1% > 1% 65% > 65% < 125% % Capital required at September 3, 216 Capital required at June 3, 216 Capital required at March 31, 216 Capital required at December 31, 215 Category risk weights 1% > 1% 2% > 2% 5% > 5% 1% > 1% 65% > 65% < 125% % Page 17

19 Market Risk Market Risk Market Risk is the risk that movements in market factors, such as foreign exchange rates, interest rates, credit spread, equity prices and commodity prices will reduce the value of our portfolios. Market Risk Governance (a) HSBC Bank Canada s strategic objectives in undertaking trading activities are to solidify the Bank s position as the leading international bank in Canada through finance-focused and emerging markets-led strategy. The Bank delivers global products and solutions to domestic clients, and provides global clients access to local products and services. HSBC Bank Canada computes various measures to monitor market risk and compute capital charges, including sensitivity (daily) to changes in risk factor values, (daily), stressed (weekly), and stress testing (monthly). The risk measures are compared to limits and breaches are escalated to senior management. Calculations are performed using global models and systems for measuring market risk. Information from the Primary Systems is sent to the global systems, where the calculations are performed and made available for review. (b) Market Risk is the independent oversight unit within HSBC Bank Canada and has a mandate to ensure that market risks are within the risk appetite of the Bank. Market Risk is responsible for the daily calculation of market risk measures and backtesting reports, setting of limits and monitoring exposures against limits, and calculation and reporting of capital charges. The Global Risk Analytics team, which is responsible for development and validation of model methodology, as well as liaison with external regulators, works closely with the core Market Risk team. The Audit and Risk Committee (ARC), a committee of the Board of Directors, has non-executive responsibility for oversight and advice to the Board on matters related to financial reporting and high-level risk related matters and governance. The Risk Management Committee (RMC) has a mission to provide strategic enterprise-wide risk management. A subcommittee of the RMC is the Wholesale and Market Risk Model Oversight Committee, which is primarily responsible for oversight (including approval, monitoring, vetting, ensuring fitness of purpose, etc.) of models, primarily Basel models used in the estimation of regulatory capital charges. The Market Risk IMA Steering Committee is responsible for providing guidance on preparation of the Market Risk IMA application. As OSFI granted conditional approval for the Market Risk IMA application in January 216, the Steering Committee s main focus now is on tracking and oversight of remediation work to obtain full approval for the IMA. (c) HSBC Bank Canada uses HSBC global models and systems for measuring market risk. Sensitivity to risk factor shocks are computed by the primary trading systems. These sensitivities are sent to the Group systems, which compute and stressed and perform stress testing. Backtesting by comparing to the daily profit and loss is also performed. Market Risk calculations are reported daily via to Market Risk teams and senior management. A local system has been set up to collect market risk results and prepare monthly and quarterly regulatory reports. Page 18

20 Market Risk Internal Model (IMA) (a) At HSBC Bank Canada the IMA covers, stressed, and stress testing calculations for the Book. A historical simulation approach is used to measure general market risk for interest rate and foreign exchange risk factors. All risks are included in the historical simulation approach for general market risk. A standard charge approach is used to estimate the interest rate specific risk. (b) At HSBC Bank Canada the IMA is used to measure the general market risk for the Book. HSBC Bank Canada uses the global models and systems to compute general market risk. Information from the primary trading systems is passed to the global market risk systems and the results are made available to HSBC Bank Canada. A local system is used to compute the standard charge. (c) A historical simulation approach is used to compute and stressed. (d) For management purposes 1-day and 1-day are computed. For regulatory purposes, 1-day and 1-day are computed. (e) For, the historical scenarios are updated twice each month. 5 days of historical scenarios are used without weighting. The 1-day is computed using 1-day scaled by square root of 1 and an additional multiplicative factor to provide a conservative estimate. For specific risk, the standard charge calculation is separate from the historical simulation approach for the general market risk. The standard charge is aggregated with the and contributions when computing the market risk capital charge. A sensitivity-based approach is used to compute the profit and loss for the calculation. Relative returns are used for credit spreads and exchange rates and absolute returns are used for interest rates. (f) For the calculation, 1-day is computed directly and 25 scenarios are used. Each quarter the stressed period is determined by computing for overlapping 25 day windows going back to 28 to determine the period yielding the largest value. This 25 day period is then used for the remainder of the quarter for the weekly calculation. Both global and HSBC Bank Canada stressed period are computed. A multiplier (greater than or equal to 1) is computed as the ratio of the using the HSBC Bank Canada period and the global period. When the is computed on a weekly basis, the global period is used for Group aggregation purposes. For local regulatory purposes the determined using the global period is scaled by the multiplier. As in the case of, the sensitivity approach is used to compute profit and loss used in the calculation. (g) Stress Testing is performed on monthly basis using both globally-defined and locally-defined scenarios. The locally-defined scenarios are chosen based on the HSBC Bank Canada portfolio and relevant risk factors. profit and loss figures are compared against limits and breaches are reported to senior management. (h) Backtesting is performed on a daily basis. The historical simulation general market risk 1-day is compared against the hypothetical 1 day profit and loss (assuming portfolio remains constant over the 1 day). This is done at various levels, including Book, lines of business, and at the risk factor level. Breaches of 99%-ile 1-day are investigated and reported to the regulator within 2 business days. Page 19